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Prot maximization

Exercises of Microeconomics

Technology and Prot Maximization (Ch. 1-2 Varian)

Technology

Prot maximization

Outline

1 Technology

Exercise 1.2

Exercise 1.3

Exercise 1.5

Exercise 1.9

Exercise 1.11

2 Prot maximization

Exercise 2.3

Exercise 2.4

Exercise 2.5

Exercise 2.7

Exercise 1.2

Technology Exercise 1.3

Prot maximization Exercise 1.5

Exercise 1.9

Exercise 1.11

Outline

1 Technology

Exercise 1.2

Exercise 1.3

Exercise 1.5

Exercise 1.9

Exercise 1.11

2 Prot maximization

Exercise 2.3

Exercise 2.4

Exercise 2.5

Exercise 2.7

Exercise 1.2

Technology Exercise 1.3

Prot maximization Exercise 1.5

Exercise 1.9

Exercise 1.11

Exercise 1.2

technology y = a x + a x when a 6= a ?

/ 1

1 1 2 2 1 2

the curvature of an isoquant and can be calculated as:

TRS d (x /x ) 2 1

=

(x /x ) dTRS

2 1

d ln(x /x )

2 1

=

d ln |TRS |

Tramontana Exercises Micro

Exercise 1.2

Technology Exercise 1.3

Prot maximization Exercise 1.5

Exercise 1.9

Exercise 1.11

Solution

Remember that:

f / x1

TRS =

f / x2

in our case:

1

f 1 1

= ax

+ a2 x2

a x 1

for i = 1, 2

xi

1 1 i i

from which:

a x

!1

TRS = 1 1

a 2 x 2

Exercise 1.2

Technology Exercise 1.3

Prot maximization Exercise 1.5

Exercise 1.9

Exercise 1.11

Solution

so that:

1

x2 a2 1

= TRS

x1 a1

and taking logs:

x 1 a

!

ln ln |TRS | + ln

2 2

= ,

x1 1 a 1

d ln(x /x )

2 1 1

= = .

d ln |TRS | 1

Tramontana Exercises Micro

Exercise 1.2

Technology Exercise 1.3

Prot maximization Exercise 1.5

Exercise 1.9

Exercise 1.11

Outline

1 Technology

Exercise 1.2

Exercise 1.3

Exercise 1.5

Exercise 1.9

Exercise 1.11

2 Prot maximization

Exercise 2.3

Exercise 2.4

Exercise 2.5

Exercise 2.7

Exercise 1.2

Technology Exercise 1.3

Prot maximization Exercise 1.5

Exercise 1.9

Exercise 1.11

Exercise 1.3

f (x) xi

i (x ) =

xi f (x)

a

1

b

2

function with respect to the factor x : 1

f (x)

= ax1a1 x2b

x1

Exercise 1.2

Technology Exercise 1.3

Prot maximization Exercise 1.5

Exercise 1.9

Exercise 1.11

Solution

f (x) x1 ax x a b

1 (x ) = = 1 2

=a

x1 f (x) xx a

1

b

2

f (x) x2 bx x a b

2 (x ) = = 1 2

= b.

x2 f (x) xx a

1

b

2

Exercise 1.2

Technology Exercise 1.3

Prot maximization Exercise 1.5

Exercise 1.9

Exercise 1.11

Solution

following alternative denition:

d ln f (x)

i (x ) =

d ln x i

ln f (x ) = ln x x = ln x + ln x

a

1

b

2 1

a b

2

that is

ln f (x ) = a ln x + b ln x

1 2

and nally:

d ln f (x) d ln f (x)

1 (x ) = =a ; 2 (x ) = =b .

d ln x1 d ln x 2

Exercise 1.2

Technology Exercise 1.3

Prot maximization Exercise 1.5

Exercise 1.9

Exercise 1.11

Outline

Exercise 1.2

Exercise 1.3

Exercise 1.5

Exercise 1.9

Exercise 1.11

2 Prot maximization

Exercise 2.3

Exercise 2.4

Exercise 2.5

Exercise 2.7

Exercise 1.2

Technology Exercise 1.3

Prot maximization Exercise 1.5

Exercise 1.9

Exercise 1.11

Exercise 1.5

1/

1 2

?

dy (t ) t

e (x) =

dt y =t 1

or:

df (t x) t

e (x) =

dt f (t x) = t 1

Exercise 1.2

Technology Exercise 1.3

Prot maximization Exercise 1.5

Exercise 1.9

Exercise 1.11

Solution

f (t x) = (tx ) + (tx2 ) =t x + x

1/ 1/

1 1 2

that is:

f (t x) = tf (x).

The CES function exhibits constant returns to scale.

In particular:

df (t x) t dtf (x) t

e (x) = = = 1.

dt f (t x) = t 1

dt tf (x) = t 1

Exercise 1.2

Technology Exercise 1.3

Prot maximization Exercise 1.5

Exercise 1.9

Exercise 1.11

Solution

The elasticity of scale can be written as:

d ln f (t x)

e (x) =

d ln t = t 1

In our case:

1

ln f (tx ) = ln t + ln x + x

1 2

so:

e (x) = 1.

Exercise 1.2

Technology Exercise 1.3

Prot maximization Exercise 1.5

Exercise 1.9

Exercise 1.11

Outline

Exercise 1.2

Exercise 1.3

Exercise 1.5

Exercise 1.9

Exercise 1.11

2 Prot maximization

Exercise 2.3

Exercise 2.4

Exercise 2.5

Exercise 2.7

Exercise 1.2

Technology Exercise 1.3

Prot maximization Exercise 1.5

Exercise 1.9

Exercise 1.11

Exercise 1.9

1/

1 2 1 1 2 2

write this in the form

f (x , x ) = A() bx + (1 b)x

1 2 1

/

2

. 1

a + a2

Let us multiply the parameters a and a by = 1:

1

1 2

a 1 + a2

# 1

(a + a )a (a + a )a

"

f (x1 , x2 ) = 1 2 1 x1 + 1 2 2 x2 .

a1 + a2 a1 + a2

Exercise 1.2

Technology Exercise 1.3

Prot maximization Exercise 1.5

Exercise 1.9

Exercise 1.11

Solution

# 1

a a

"

1

f (x , x ) = (a1 + a2 )

1

x + 2

x

1 2

a 1 + a2 1

a 1 + a2 2

a a

and by noting that = 1 we can nally have:

2 1

a 1 + a2 a 1 + a2

f (x , x ) = A() bx + (1 b)x

1/

1 2 1 2

1 a

where A() = (a + a ) and b = .

1

1 2

a +a 1 2

Exercise 1.2

Technology Exercise 1.3

Prot maximization Exercise 1.5

Exercise 1.9

Exercise 1.11

Outline

Exercise 1.2

Exercise 1.3

Exercise 1.5

Exercise 1.9

Exercise 1.11

2 Prot maximization

Exercise 2.3

Exercise 2.4

Exercise 2.5

Exercise 2.7

Exercise 1.2

Technology Exercise 1.3

Prot maximization Exercise 1.5

Exercise 1.9

Exercise 1.11

Exercise 1.11

and/or convex. Assume that the parameters a and b and the

output levels are strictly positive.

V (y ):

closed (it must include its own boundary)

non-empty (each positive level of output can be produced)

Exercise 1.2

Technology Exercise 1.3

Prot maximization Exercise 1.5

Exercise 1.9

Exercise 1.11

1 2 1 2

This is a case in which the isoquants look like the isoquants of the

Leontief technology.

The main dierence is that output is measured in terms of log y :

Exercise 1.2

Technology Exercise 1.3

Prot maximization Exercise 1.5

Exercise 1.9

Exercise 1.11

Solution

(regular), monotonic and convex.

Exercise 1.2

Technology Exercise 1.3

Prot maximization Exercise 1.5

Exercise 1.9

Exercise 1.11

(b) V (y ) = {x , x : ax + bx y , x > 0}

1 2 1 2 1

Exercise 1.2

Technology Exercise 1.3

Prot maximization Exercise 1.5

Exercise 1.9

Exercise 1.11

Solution

regular.

In fact:

you can produce the quantity y with combinations of inputs in

which x is arbitrarily low, but not equal to 0. So the input

1

V (y ) is also monotonic and convex.

Exercise 1.2

Technology Exercise 1.3

Prot maximization Exercise 1.5

Exercise 1.9

Exercise 1.11

(c) V (y ) = x , x : ax + x x + bx y

1 2 1 1 2 2

In order to prove monotonicity we must calculate the rst

derivatives:

f (x1 ,x2 )

x1 = a + 2xx21 x2 0

f (x1 ,x2 )

x2 = b + 2xx11 x2 0

so V (y ) is monotonic.

Exercise 1.2

Technology Exercise 1.3

Prot maximization Exercise 1.5

Exercise 1.9

Exercise 1.11

Solution

necessary) to show that the production function is concave.

We need to calculate the Hessian matrix, so we need the second

derivatives:

32 1 1 1

f (x1 ,x2 )

x12

= 14 x1 x2

2

f (x1 ,x2 )

x1 x2 = x2 x2

1

4 1 2

12 12 1 3

f (x1 ,x2 )

x1 x2 = 1

4

x x

1 2

f (x1 ,x2 )

x22

= x2x 2

1

4 1 2

Exercise 1.2

Technology Exercise 1.3

Prot maximization Exercise 1.5

Exercise 1.9

Exercise 1.11

Solution

3 1

D 1 = 14 x1 2 x22 < 0

D 2 = 16 x1

1

x2 161 x11 x21 = 0

1 1

function is concave and the input requirement set is convex.

Exercise 2.3

Technology Exercise 2.4

Prot maximization Exercise 2.5

Exercise 2.7

Outline

Exercise 1.2

Exercise 1.3

Exercise 1.5

Exercise 1.9

Exercise 1.11

2 Prot maximization

Exercise 2.3

Exercise 2.4

Exercise 2.5

Exercise 2.7

Exercise 2.3

Technology Exercise 2.4

Prot maximization Exercise 2.5

Exercise 2.7

Exercise 2.3

a

We know (also from the Example in the text) that the rst-oder

condition is given by:

pax a 1

= w,

while the second-order condition is satised when a 1.

By expliciting x we obtain the factor demand function:

1

w a1

!

x (p , w ) =

ap

Exercise 2.3

Technology Exercise 2.4

Prot maximization Exercise 2.5

Exercise 2.7

Solution

function into the production function:

a

w a1

!

y (p, w ) = f (x (p, w )) = ,

ap

from which we nally have the prot function:

a 1

w a1 w a1

! !

(p , w ) = py (p , w ) wx (p , w ) = p w .

ap ap

Tramontana Exercises Micro

Exercise 2.3

Technology Exercise 2.4

Prot maximization Exercise 2.5

Exercise 2.7

Solution

a 1

w a1 w a1

! !

(tp , tw ) = tp tw = t (p , w ),

ap ap

then the prot function is homogeneous of degree 1.

In order to prove convexity, it remains useful to see the prot

function as follows:

1 a a 1 1 a

(p , w ) = p 1a w a1 a 1a a 1a = p 1a w a1 (a),

Tramontana Exercises Micro

Exercise 2.3

Technology Exercise 2.4

Prot maximization Exercise 2.5

Exercise 2.7

Solution

2 (p , w ) 2 (p , w )

D 2 (p, w ) =

p2 p w

(p , w ) (p , w )

2 2

wp w2

2a1 a a 1

p 1a w a1 (1aa)2 p 1a w a1

!

a

(1a)2

= a 1 1 2a (a),

( )2 p 1a w a1

1

a

a

a

(1a)2

p 1a w a1

Exercise 2.3

Technology Exercise 2.4

Prot maximization Exercise 2.5

Exercise 2.7

Solution

2a1 a

1 = a

(1a)2

p 1a w a1 (a) > 0 , 2 = 0 .

(p , w ) is convex in (p , w ).

Exercise 2.3

Technology Exercise 2.4

Prot maximization Exercise 2.5

Exercise 2.7

Outline

Exercise 1.2

Exercise 1.3

Exercise 1.5

Exercise 1.9

Exercise 1.11

2 Prot maximization

Exercise 2.3

Exercise 2.4

Exercise 2.5

Exercise 2.7

Exercise 2.3

Technology Exercise 2.4

Prot maximization Exercise 2.5

Exercise 2.7

Exercise 2.4

1 2 1

2

2 2 1 1 1 2

1/ 1.

as follows:

d ln(w x /w x ) 2 2 1 1

,

d ln(x /x ) 1 2

ln(w x /w x ) = [ln(w /w ) + ln(x /x )] .

2 2 1 1 1 2 1 2

Exercise 2.3

Technology Exercise 2.4

Prot maximization Exercise 2.5

Exercise 2.7

Solution

Therefore,

d ln(w x /w x ) d ln(w /w )

1.

2 2 1 1 1 2

=

d ln(x /x ) 1 2 d ln(x /x )2 1

f

w

|TRS | = x1 1

= ,

f

x2

w 2

d ln(w /w ) d ln |TRS |

1 = 1

1 2

d ln(x /x )

2 d ln(x /x )

1 2 1

Exercise 2.3

Technology Exercise 2.4

Prot maximization Exercise 2.5

Exercise 2.7

Solution

d ln |TRS |

but is the inverse of the elasticity of substitution , so

d ln(x /x )

1 2

1

1

Exercise 2.3

Technology Exercise 2.4

Prot maximization Exercise 2.5

Exercise 2.7

Outline

Exercise 1.2

Exercise 1.3

Exercise 1.5

Exercise 1.9

Exercise 1.11

2 Prot maximization

Exercise 2.3

Exercise 2.4

Exercise 2.5

Exercise 2.7

Exercise 2.3

Technology Exercise 2.4

Prot maximization Exercise 2.5

Exercise 2.7

Exercise 2.5

is 1 .

calculated as follows:

d ln(w x /w x

2 2 1 1 )

.

d ln(w /w )

2 1

ln(w x /w x ) = [ln(w /w ) + ln(x /x )] ,

2 2 1 1 2 1 2 1

Exercise 2.3

Technology Exercise 2.4

Prot maximization Exercise 2.5

Exercise 2.7

Solution

so we have that:

d ln(w x /w x ) d [ln(w /w ) + ln(x /x )] d ln(x /x )

= 1

2 2 1 1 2 1 2 1 2 1

= ,

d ln(w /w )

2 1 d ln(w /w ) 2 1 d ln |TRS |

and nally:

d ln(w x /w x )

= 1.

2 2 1 1

d ln(w /w )

2 1

Exercise 2.3

Technology Exercise 2.4

Prot maximization Exercise 2.5

Exercise 2.7

Outline

Exercise 1.2

Exercise 1.3

Exercise 1.5

Exercise 1.9

Exercise 1.11

2 Prot maximization

Exercise 2.3

Exercise 2.4

Exercise 2.5

Exercise 2.7

Exercise 2.3

Technology Exercise 2.4

Prot maximization Exercise 2.5

Exercise 2.7

2

have x 0.

(a) What is the rst-order condition for prot maximization if

x > 0?

We know that:

(x ) = f (x ) wx = 20x x 2 wx

0 (x ) = 20 2x w = 0.

Exercise 2.3

Technology Exercise 2.4

Prot maximization Exercise 2.5

Exercise 2.7

From the previous point we know that the optimal level of input is

given by:

20 w

x =

2

which is equal to zero provied that:

w = 20

but also if w > 20, in fact the input level cannot be negative.

Exercise 2.3

Technology Exercise 2.4

Prot maximization Exercise 2.5

Exercise 2.7

We must solve:

20 w

x = = 10

2

from which:

w = 0.

Exercise 2.3

Technology Exercise 2.4

Prot maximization Exercise 2.5

Exercise 2.7

expliciting x :

20 w w

x= = 10

2 2

but given the physical restriction concerning the non-negativity of

the input's level we should write:

Exercise 2.3

Technology Exercise 2.4

Prot maximization Exercise 2.5

Exercise 2.7

Until now we have:

(x , w ) = 20x x 2 wx = (20 w x )x

w

!2

(w ) = 10 .

2

Exercise 2.3

Technology Exercise 2.4

Prot maximization Exercise 2.5

Exercise 2.7

easily calculate the derivative:

w 1

! !

0 (w ) = 2 10

2 2

that is:

w

!

(w ) = 10

0

,

2

which is the negative of the factor demand, as we should expect.

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